A company makes an export sale denominated in a foreign currency and allows the customer one month to pay. Under the two-transaction perspective, accrual approach, how does the company account for fluctuations in the exchange rate for the foreign currency? Why might a company prefer a foreign currency option rather than a forward contract in hedging a foreign currency firm commitment? Why might a company prefer a forward contract over an option in hedging a foreign currency asset or liability?
Part II (200 Words)
What are the two major conceptual issues that must be resolved in translating foreign currency financial statements? What factors create a balance sheet (or translation) exposure to foreign exchange risk? How does balance sheet exposure compare with transaction
exposure?
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